Major Averages Flirt With Record Highs
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
| Back and forth trading left the major averages mostly higher this week and flirting with record highs as soft jobs numbers and mixed economic data put pressure on interest rates. While there were signs of inflation in the numbers, there were also indications that the economy could be slowing from the red-hot numbers recorded earlier in the year as the economy reopened. Investors came back from the long, holiday weekend in a celebratory mood from reopening events and falling coronavirus cases and equities opened the period sharply higher. The different indexes gave back most of the gains on weakness in big cap technology shares however, and finished mixed but underlying breadth was positive. The DJIA traded higher for a fifth consecutive session on Wednesday on strength in oil related names as crude oil prices hit a two-year high on projections of strong demand by OPEC and Russia. A jump in Labor Costs to +1.7% on Thursday renewed inflation worries and sent growth stocks lower again on Thursday, but a ‘Goldilocks’ Jobs report on Friday pushed yields lower and stocks higher to end the week. Big cap technology names did the heavy lifting to close out the week and the major averages had their sights on all-time highs going into the weekend. Energy (XLE) outperformed, surging +6.72%, while REITs (XLRE), Financials (XLF) and Technology (XLK) were also higher. Consumer Discretionary (XLY) and Healthcare (XLV) lagged the broader market. The jump in oil helped lift the commodity $CRB Index to a new all-time high. Friday’s bounce kept the major averages moving higher for a second straight week and the NYSE Composite Index (NYA) sitting at a fresh all-time high.
For the period, the DJIA added 226.94 points (+0.7%) and closed at 34756.39. The S&P 500 picked up 25.78 points (+0.6%) and settled at 4229.89. The NASDAQ gained 65.75 points (+0.5%) to close at 13814.49, while the small cap Russell 2000 again outperformed climbing 17.44 points (+0.8%) finishing at 2286.41. Market Outlook:The technical condition of the market improved this week with the major averages all advancing and record highs in sight. The NYSE Composite was able to punch several new record highs during the period. The technical indicators are in positive territory with MACD, a reliable trend gauge, in bullish ground for the different indexes and Momentum, as measured by the 14-day RSI, on the rise. The NASDAQ, Russell 2000 and Philadelphia Semiconductor Index were able to bounce off key moving average (MA) support levels early in the week and closed back above their respective 50-day MA which is a positive going forward. Semiconductors outperformed the broader market for a second week, as did the small cap Russell 2000. The Russell 2000 has flirted with breaking above a descending trend line at 2289-2300 and stalled at that resistance line on Friday. A break above that would be bullish for the broader market. The DJ Transportation Index showed negative divergence reflecting the increase in fuel costs and ended lower. Several sector ETFs touched new 52-week highs this week, including Financials (XLF), Communication Services (XLC), Consumer Staples (XLP), REITs (XLRE) and Energy (XLE) which shows a broadening of the rally beyond Technology (XLK) shares. Internal breadth remains supportive of higher prices with the NYSE Advance/Decline line, a leading indicator of market direction, hitting record highs showing most stocks are still under accumulation. New 52-week highs on both the NYSE and NASDAQ expanded. The Sentiment Index remains in negative ground as investors remain too bullish. Furthermore, Bears are hard to find. The American Association of Individual Investors (AAII) Bull-Bear ratio hit 2.2:1, its biggest number since mid-April with more than twice as many Bulls to Bears, while The National Association of Active Investment managers (NAAIM) Exposure Index also saw a rise in bullishness jumping to 82.3 from 44.2 just two-weeks ago. Finally, FINRA’s Customer Margin Balance shows Margin levels at another record high of $847,186,000 at the end of April, which could be looked at as a red flag. Although a record margin level is not a sell signal in of itself, a sharp drop in stock prices could see margin calls and induce more selling. I’ve mentioned the last few weeks that the major averages look range bound and have lacked a catalyst to break out to new highs. While the different indexes have been stuck in a holding pattern, market participants need to keep an eye on inflation and rates. This week the pull back in yields sent Treasury Bond prices up to resistance levels and a break above that resistance could be the catalyst to send stocks higher. The iShares 7-10 Treasury Bond ETF (IEF) would break out of its range at 114.80-115, while the iShares 20+ Treasury Bond ETF (TLT) breaks resistance at 140.50-141. That would set a target yield of 1.29% on the 10-year T-Bill and 2.15% on the 30-year T-Bill and lead to a breakout in equities. If those resistance levels hold, it could mean the major averages would remain range bound or signal a top for the current rally. The major averages went into the weekend somewhat overbought with the Market Edge/S&P Short Range Oscillator at +4.72%. In addition, the Market Edge CTI is negative, which historically has pointed to weakness in the market. With conflicting signs in some of the market indicators, the Market Posture remains Neutral at this time. A chart of these indicators can be found by going to the Market Edge Home page and clicking on Market Recap, which is on the right-hand side of the page just below the Second Opinion Status numbers. Cyclical Trend Index (CTI): The underlying premise of the CTI is that the market, as measured by the Dow Jones Industrial Average (DJIA), tends to move in cycles that often resemble sine waves. There are five identifiable cycles, each with different time durations at work in the market at all times. Currently, the CTI is Negative at -6, down one unit from the previous week. Cycle E is bullish, while Cycles A, B, C and D are bearish. The CTI is projected to remain in negative territory into July. At that time we will see a reset of the different cycles that should lead to a resumption of the bull market into the fall. Momentum Index (MI): The market’s momentum is measured by comparing the strength or weakness of several broad market indexes to the DJIA. Readings of -4 and lower are regarded as bearish since it is an indication that a majority of the broader based market indexes are weaker than the DJIA on a percentage basis. Conversely, readings of +4 or higher are regarded as bullish. The Momentum Index is Neutral at -1, unchanged from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 2361 units while the number of new 52-week highs out did the new lows on all five sessions. Breadth was also positive at the NASDAQ as the A/D line added 1461 units while the number of new highs beat the new lows on each day. Finally, the percentage of stocks above their 50-day moving average fell to 65.1% vs. 67.0% the previous week, while those above their 200-day moving average eased to 84.4% vs. 84.8%. Readings above 70.0% denote an overbought condition, while below 20% is bullish. Sentiment Index (SI): Measuring the market’s Bullish or Bearish sentiment is important when attempting to determine the market’s future direction. Market Edge tracks thirteen technical indicators listed below that measure excessive bullish or bearish sentiment conditions prevalent in the market. In addition, we track money flows into and out of Equity Funds and ETFs which as of 6/02/21 shows outflows of $4.6 billion. Currently, the Sentiment Index is Negative at -2, down a notch from the previous week. Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Neutral as of the week ending 5/28/2021 (DJIA ñ 34529.43). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
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